Hello all,
I need some help / advice regarding taxes…… I though someone here might have worked throught a similar situation. My wife and I own a house that we have been renting since Feb 07 (since we could not sell it). I am trying to figure out how to deal with the “income” we recieved from this house. I say “income” because we actually lost about 1k as we were not able to rent to house for enough money to cover the mortage. I am using TaxCut software (similar to TurboTax), but I do not understand what to do when the software asks for a 1099 for the rental. Where would a 1099 come from, would I send it to myself. FYI I am used to filing 1099 and 1096 with the IRS for my business, but I need some help with this issue. Thanks in advance!
Matt
Replies
Prior to incorporating and using a CPA I filled out Schedule E for my rental. Still done that way.
You can also claim depreciation so you might want to have a CPA work this up for you. It gets complicated and the rules change annually. You'd be surprised at how many expenses you can charge to a rental to offset the income and if you post a loss that will reduce the 1040 adjusted gross income which will help reduce your taxes.
"You can also claim depreciation"I'd advise him to most certainly claim depreciation. Even if he doesn't, the government will force him to treat his final disposition as if he did and recapture it! Imagine the surprise a guy would have being forced to recapture depreciation when he didn't take the deduction in the years he was supposed to! Bob's next test date: 12/10/07
Thanks for responding. I understand the concept of depreciation ( I think) what I do not understand is how I document the amount that I paid each month as a mortage payment. I have the schedule E, but I do not understand if those mortage payments are to be listed on schedule E as expenses somehow, or if depreciation covers that.
Thanks,
Matt
I'm no real estate tax accountant. I have a CPA that does ours. There are several guys in here that actually know a lot about this stuff....ten times more than me. I have a real estate tax book but that is the driest reading since.....since....forever! Anyways, I thought all that stuff got put on a K1. Maybe that's just because of the way we held the property. Bob's next test date: 12/10/07
You said, "I have the schedule E, but I do not understand if those mortage payments are to be listed on schedule E as expenses somehow, or if depreciation covers that."Deductible mortgage expense comes from the end-of-year statement you received from the lender. There will be a line called "year-to-date-interest" or something similar. That is the amount you can deduct as an expense. The rest of your payment is equity and that is not deductible.If TaxCut is really comparable to TurboTax, it will walk you through setting up your rental property, depreciation as well as every other kind of expense. If not, you should go buy TurboTax instead. TTax has an "Easy Step" interview mode that asks you questions step by step through every aspect of setting up a property, depreciation (it knows what method you are allowed to use), taxes, interest, repairs, maintenance, loan fees amortization, and much more. It will also remember in future years what depreciation expenses have been taken before and keep a running total of depreciation to date for you.BruceT
Edited 4/3/2008 10:48 pm by brucet9
Thanks for the advice. Perhaps I should try TurboTax. Or an accountant!
"...TurboTax. Or an accountant!"Sounds like TaxCut isn't doing the job for you.It's tough to get in with a good accountant at this time of year; they're up to their ears in work. Still, if you are unsure of using tax software on your own for something complicated like rental property, you could prepare your return with TurboTax (you can buy and download it online) and then have an accountant (not a tax preparer and definitely not H&R Block) review your return to be sure you did it right. If you can't get an accountant to check your return before filing time, you could file anyway and then file an amended return, if necessary, in a month or so after your accountant reviews the return.Once everything is set up properly the first time, following years take care of themselves. TTax will import information from the previous year's tax file and you simply follow the interview steps to input the new income and expense figures.Good luck.
BruceT
TC is very similar to TT. Now I have not used TT for a number of years. But when I did they where simiilar.I doubt that TT would be much different for him.The problem is he does not understand the very basics of rental, such as looking for a place to deduct his mortgage payments.And it has a lot of information in the Help. Some theirs, some from IRS forms, some from IRS pubs.But I find that it is hard to read in the format that they put it because it basically opens a small window into a large document.For more complicated questions I go directly to the IRS pubs.BTW, H&R (which is also the publisher of TC) has a very wide range of tax preparers. If he can find one that is proficient with sch E and depreciations he will get a good results.But I also know that alot of low level preparers also.As proof of that they tried to hire me..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
"But I also know that alot of low level preparers also.As proof of that they tried to hire me."Was the above line written by Groucho Hartmann? :)
BruceT
"I document the amount that I paid each month as a mortage payment. I have the schedule E, but I do not understand if those mortage payments are to be listed on schedule E as expenses somehow, or if depreciation covers that."You really need to fill for an extension and either do some reading or/or get a tax pro to do it, at least this year.You are way, way over your head.First of all TC ask a lot of questions to try and match up your source data.TC and the IRS does not if you got did not get a 1099 for the rent. In fact it is unusal for you to get a 1099 for a residentce.If not on that screen, on the next one it has a place to enter the (total) monthly rent. Also if you got prepaid rent, work in place of rent, etc. But when it ends up on the sch E form it is just one total of rent.As you go through the interview form it at one place it will ask you any interest on the realestate. There are 2 place, on if you get a 1098, another if you don't. On the interest is deductable NO THE MORTGAGE PAYMENTS.And it will go through the setup at some later point for the depreciation.Depreciation is a little tricky. Since this is a conversion IIRC you need to start with the cash basis of the house and the market value on the date of conversion and use the lessor amount.Then you need to split the value between the land, which is not depreciated, and structure, which is depreciated.If you go to IRS.GOV they have a publication on rentals..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
TaxCut is asking for 1099 because some landlords have tenants whose rents are subsidized by HUD or the county. If you had such a tenant you would receive a 1099 Miscellaneous from whatever housing agency had been paying you.
If you don't have a tenant on housing assistance then simply skip the 1099 step.
Don't forget that mileage for every trip to the property to meet prospective tenants, fix things, collect rent, inspect, etc. is deductible at the rate of something like 38.5 cents per mile. I use Google maps "travel directions" to find the exact distance to each of my rental properties.
Be sure that you check "active participation" in the setup of the property so your rental losses (actual and depreciation) will cancel out part of your other income.
Thanks for the response - that clears up the 1099 question!
What I don't understand is this: When I use TaxCut to figure the tax, it says that I owe about 1k in taxes on the income from this property, however I actually lost money on the deal! How can I owe taxes on money that I did not earn?
Thanks,
Matt
More like 50 cents a mile now if I remember right...thread hijack.....anybody know if the amount of a down payment is reported to the IRS when buying a house....wanna know because 401K withdrawls used for down payments receive favorable treatment.....end hijack
"More like 50 cents a mile now ..."My mistake, it's 48.5 cents, not 38.5 per mile now.
BruceT
As of March 19, 2008, it is 50.5 cents per mile. At least that is the rate we are reimbursed for POV.http://tinyurl.com/czoyb
"As of March 19, 2008, it is 50.5 cents per mile."
Maybe so, but for the tax year 2007 the amount was 48.5 cents.
BruceT
i'm going to step off into something you didn't ask about. i see people getting caught in this and it's a shame to have it happen.
as a homeowner if you would sell this house all profits are tax free [i think up to 500k,i've never had to worry about that]this is the greatest tax shelter in the world.
now if it's a rental property you will have capital gains to pay on the entire amount when you sell.
lets just say you make a 100k on this house.as a homeowner zero tax. as a landlord you owe 15k to feds and maybe another 10 to state,so it just cost you 25k to sell. i was just told by my tax man that a 100k cap gains would probably end up costing me in the 40k range.
you really need to talk to a accountant and no what your options are. i believe you have to have lived in it 2 of the last 5 years to be a homeowner. larry
if a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
I think it would probably be worth your while (and money) to get turbotax. I know very little about this stuff, but Turbo tax seems to handle depriciation/expenses/etc. quite easily. I'm in a similar situation.
By the way, you should keep in mind that even if the rent doesn't cover the mortgage, you may not actually be taking a loss, since you're presumably paying down some of the principal in your mortgage payments. If you're not paying principal, you really would be taking a loss, of course.
I think turbo tax is about $75 for federal and state programs.
zak
"When we build, let us think that we build forever. Let it not be for present delight nor for present use alone." --John Ruskin
"so it goes"
i'm going to step off into something you didn't ask about. i see people getting caught in this and it's a shame to have it happen.
as a homeowner if you would sell this house all profits are tax free [i think up to 500k,i've never had to worry about that]this is the greatest tax shelter in the world.
now if it's a rental property you will have capital gains to pay on the entire amount when you sell.
lets just say you make a 100k on this house.as a homeowner zero tax. as a landlord you owe 15k to feds and maybe another 10 to state,so it just cost you 25k to sell. i was just told by my tax man that a 100k cap gains would probably end up costing me in the 40k range.
you really need to talk to a accountant and no (know) what your options are. i believe you have to have lived in it 2 of the last 5 years to be a homeowner. larry
The above is excellent advise. If you are in the two year zone and sell it you will be better off financially. If you keep it as a rental you will have a number of things that you can write off, BUT!! You may make money on it and have taxes to pay on that money. The object of rental property is to make money off of the rents. If your expenses are more than the rents you have a loss that can lower you taxes.
File for an extension and look at your options. You may want to sell it. You can also file an ammended return later. I think that you can go back 3 years to ammend returns.
If you're renting a home you lived in, should you take depreciation if you're planning on selling it within the "2 out of 5" window?
I guess if for some reason you aren't able to sell it, then you'd wish you did take depreciation.
Does anyone know what happens if you exceet the 2 out of 5 window by a little bit? Does the whole gain become taxable?
For example, let's say you buy a house for $100,000 in 1995 and live in it for 13 years so now it is worth $300,000. If you sell now, that $200,000 in capital gain is tax free.
If you rent it for 2-3 years and then sell, that $200,000 in capital gain is still tax free (because you fall in the 2 out of 5 window).
However, if you run into trouble, and then don't sell it for 4 years, then all of a sudden you have to pay tax on that $200,000 - which would likely be far more than any profit on the rental. However, it doesn't quite seem right that all the $200,000 should be taxable - since most of the gain was when it was your primary residence. However, what seems right doesn't mean anything to the IRS.
So, it seems like if you're renting a house you lived in, you'd better be darn sure you sell it less than 3 years after you move out - at almost any price, otherwise you're hit with a huge tax bill.
If the tax code was reasonable there would be 1 page for the tax codes.Not 20,000 ft of tax code books and rulings.Sorry Charlie, one day out no exemption. And to be sure you need to check the exact wording to see if it is 24 months, 365*2, or ???Now if you want to put the money in another rental you can delay the taxes by using a 1031 exchange.BTW, there allowance if you are "forced" to move before the 2 years (such as change in jobs) then you can prorate the exemption..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Here's what you should do. Print the Sch E and review it to see if you really made a profit from the rental.
verify rents recieved.
verify all expenses are listed.
Verify mortgage interest is listed.
verify that depreciation is taken.
Depreciation: your basis on the house for rental purposes is the lower of FMV or what you have invested in the property. Do not depreciate the value of the land. It should be depreciated over 27.5 years.
FYI: You many have a CASH FLOW LOSS because the mortgage payment includes principal payment and you cannot deduct the amount paid down on principal.
You get out of life what you put into it......minus taxes.
Marv
If you're into rentals, (even if only your old home) get an accountant.
Thanks to everyone for the help and advice. I clearly do not have an adequate understanding of the issue. I was able to meet with my new accountant today and discuss this and he has set me straight on severel issues. Does anyone have any recommended reading on the "ins and outs" of rental property?
Thanks,
Matt
Here's a couple of websites:http://www.mrlandlord.com
http://www.creonline.com++++++++++++++++++
"Where will our children find their enjoyment when everything gets itself done by steam? Frederick Law Olmsted, 1850s.
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Look for a local Apartment Association. They will have up-to-date documents for your area - rental agreements, 3-day notices, credit checking services and information on all sorts of things that affect local landlords.
BruceT